Discharge of the Surety under the Indian Contract Act, 1872: Variance under Section 133, Release of the Principal Debtor, Composition and Giving Time, Impairment of Remedy, Loss of Security, and Guarantees Invalid from the Outset

The surety is a volunteer in the eyes of the law. He undertakes a liability for somebody else's debt, he gets nothing for it, and the creditor holds all the cards. The Act responds by treating him as a favoured debtor and by discharging him whenever the creditor does anything that alters the bargain he guaranteed or damages the position he would occupy on paying. Seven sections deal with discharge by the creditor's conduct, three more invalidate a guarantee from the outset, and there are further modes outside the chapter. This topic collects all of them.

1. The Modes of Discharge

Mode	Provision	Extent of the discharge
Revocation by notice, in a continuing guarantee	Section 130	As to future transactions only
Death of the surety, in a continuing guarantee	Section 131	As to future transactions only, subject to a contract to the contrary
Variance in the terms of the principal contract	Section 133	Complete, as to transactions subsequent to the variance
Release or discharge of the principal debtor	Section 134	Complete
Composition, giving time, or agreement not to sue	Section 135	Complete
Impairment of the surety's eventual remedy	Section 139	Complete
Loss of, or parting with, a security	Section 141	Pro tanto, to the extent of the value of the security
Guarantee obtained by misrepresentation or concealment	Sections 142 and 143	The guarantee is invalid from the outset
Failure of a co-surety to join	Section 144	The guarantee is not valid

2. Variance: Section 133

Sections 133 and 134, Indian Contract Act, 1872

133. Discharge of surety by variance in terms of contract. Any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.

Illustration. (b) A contracts to lend B five thousand rupees on the first of March. C guarantees repayment. A pays the five thousand rupees to B on the first of January. C is discharged from his liability, as the contract has been varied, inasmuch as A might sue B for the money before the first of March.

134. Discharge of surety by release or discharge of principal debtor. The surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.

📖 Holme v. Brunskill, (1878) 3 QBD 495 (CA)

Facts: A surety guaranteed a tenant's performance of the covenants in a lease of a sheep farm, which included an obligation to deliver up the farm and the flock in good condition. During the tenancy the landlord and the tenant agreed, without the surety's consent, that one field should be given up by the tenant in return for a reduction in rent. At the end of the term the flock was deficient and the landlord sued the surety.

Held: The surety was discharged. Cotton LJ stated the principle that has governed ever since: if there is any agreed variation of the contract which the surety guaranteed, the surety is entitled to say that he is discharged, and the court will not inquire into whether the alteration was in fact prejudicial to him. The only exception is where the variation is, without inquiry, evident that it cannot prejudice the surety or is obviously unsubstantial, or where the surety has consented to it. The surety is entitled to insist on the terms of the bargain he guaranteed, and it is not for the creditor to tell him that the changed bargain is just as good.

Ratio: Any variance in the guaranteed contract made without the surety's consent discharges him, and the court will not weigh whether it prejudiced him, unless the variation is obviously insubstantial or self-evidently incapable of prejudicing him.

⚠ The variation must be to the contract the surety guaranteed

Section 133 is strict but it is not unlimited. Three qualifications are applied. The change must be to the terms of the contract between the principal debtor and the creditor, and not merely a change in the manner in which the creditor conducts his own affairs. It must be made without the surety's consent, so a guarantee containing an express clause permitting variations, which most bank guarantees do, removes the section's operation. And where the alteration is made in the surety's own document and is beneficial to him, he is not discharged, which is what the Supreme Court held in M. S. Anirudhan v. Thomco's Bank Ltd., AIR 1963 SC 746, where a guarantee figure was altered downwards to match the sum actually advanced.

What the creditor does, and how far the surety is released

3. Release of the Principal Debtor: Section 134

Section 134 has two limbs. The surety is discharged by a contract between the creditor and the principal debtor releasing the latter; and he is discharged by any act or omission of the creditor whose legal consequence is the principal debtor's discharge. The rationale is the accessory nature of the guarantee: if the principal obligation goes, there is nothing left for the guarantee to secure, and the surety's right of subrogation against the principal debtor would be worthless.

A release by agreement discharges the surety, and so does a release by operation of law brought about by the creditor's own act.
An omission is enough where its legal consequence is the discharge of the principal debtor, for example a failure to take a step the law required in order to preserve the claim.
Discharge of the principal debtor by operation of law without the creditor's act, such as by insolvency proceedings, does not discharge the surety, since the section requires an act or omission of the creditor. This is the point on which most litigation turns in the insolvency context.
A reservation of rights against the surety, expressly made when releasing the principal debtor, is the standard device by which creditors avoid the section, and it is effective because the arrangement is then in substance a covenant not to sue rather than a release.

4. Composition, Giving Time and Forbearance: Sections 135 to 137

Sections 135, 136 and 137, Indian Contract Act, 1872

135. A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.

136. Surety not discharged when agreement made with third person to give time to principal debtor. Where a contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor, the surety is not discharged.

137. Creditor's forbearance to sue does not discharge surety. Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety.

The creditor's conduct	Effect on the surety	Provision
A binding agreement with the principal debtor to give time	Discharged	Section 135
A binding agreement with the principal debtor not to sue	Discharged	Section 135
A composition with the principal debtor	Discharged	Section 135
An agreement with a third person to give time to the principal debtor	Not discharged	Section 136
Mere forbearance, without any binding agreement	Not discharged	Section 137
Any of the above, with the surety's assent	Not discharged	Section 135

Sections 135 and 137 must be read together, and the line between them is the existence of a binding agreement. A creditor who simply does nothing, however long, does not discharge the surety, because the surety could at any time have paid and sued the principal debtor himself. A creditor who binds himself to give time takes that possibility away, because the surety who pays and is subrogated would step into a claim that cannot yet be enforced.

📖 Amrit Lal Goverdhan Lalan v. State Bank of Travancore, AIR 1968 SC 1432

Facts: Partners of a firm opened a cash credit account with a bank, secured by the pledge of goods, the agreement providing that the borrowers were responsible for the quantity and quality of the goods pledged. A surety guaranteed the account. Questions arose as to whether there had been a variance in the terms of the contract, whether the bank had promised to give time to the principal debtor, and what the scope of Section 141 was, the pledged goods having been dealt with.

Held: The Supreme Court examined Sections 133, 135 and 141 together. A variance within Section 133 is to be inferred from an alteration in the terms of the contract between the creditor and the principal debtor, and not from every departure in practice. A promise to give time within Section 135 requires a binding agreement that ties the creditor's hands, not mere indulgence. And under Section 141 the surety is entitled to the benefit of the securities the creditor held, and is discharged to the extent of any security lost or parted with without his consent.

Ratio: Sections 133, 135 and 141 operate together to protect the surety's position. Variance and giving time require a change in, or a binding agreement about, the principal contract, and loss of a security discharges the surety to the extent of its value.

5. Release of a Co-Surety: Section 138

Section 138 provides that where there are co-sureties, a release by the creditor of one of them does not discharge the others, nor does it free the surety so released from his responsibility to the other sureties. The provision mirrors Section 44 on joint promisors and produces the same result: the creditor cannot, by releasing one, shift that person's share of the burden onto his fellows, who retain their right of contribution against him under Section 146.

6. Impairment of Remedy and Loss of Security: Sections 139 and 141

Section 139 discharges the surety where the creditor does an act inconsistent with the surety's rights, or omits an act which his duty to the surety required, and the surety's eventual remedy against the principal debtor is thereby impaired. The discharge is complete.
Section 141 entitles the surety to the benefit of every security the creditor held at the date of the guarantee, whether or not the surety knew of it, and discharges him to the extent of the value of any security lost or parted with without his consent. The discharge is pro tanto.
The two frequently operate together, as in State Bank of Saurashtra v. Chitranjan Rangnath Raja, (1980) 4 SCC 516, where a bank's negligence in the safe custody of pledged goods was held to discharge the surety on the combined operation of both sections.
The rationale is the same in both. The surety who pays is subrogated under Section 140 to the creditor's rights and securities; a creditor who destroys those rights or securities takes away the very thing the surety was entitled to receive.

7. Guarantees Invalid from the Outset: Sections 142 to 144

Sections 142, 143 and 144, Indian Contract Act, 1872

142. Guarantee obtained by misrepresentation invalid. Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.

143. Guarantee obtained by concealment invalid. Any guarantee which the creditor has obtained by means of keeping silence as to a material circumstance is invalid.

144. Guarantee on contract that creditor shall not act on it until co-surety joins. Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join.

These three sections are about the formation of the guarantee rather than about discharge, and the distinction matters. A guarantee invalid under Sections 142 to 144 never bound the surety at all, whereas a discharge under Sections 133 to 139 releases him from a guarantee that was valid when given. The creditor's duty of disclosure under Section 143 is narrower than the duty in a contract of insurance: he must not keep silence about a material circumstance, which in practice means facts affecting the risk the surety is undertaking that the surety would not expect, such as the principal debtor's existing defaults to the same creditor.

8. Modes of Discharge Outside Chapter VIII

Performance. Payment by the principal debtor or by the surety discharges the guarantee.
Novation under Section 62, which substitutes a new contract and extinguishes the old together with the guarantee attached to it.
Rescission or alteration of the principal contract under Section 62, which will usually also engage Section 133.
Remission by the creditor under Section 63, which discharges the principal debt and with it the guarantee.
Invalidity of the principal obligation, since a guarantee is accessory and has nothing to attach to.
Material alteration of the guarantee document by the creditor without the surety's consent, which avoids the instrument as against him.

9. The Position Stated Shortly

The surety is treated as a favoured debtor and is discharged wherever the creditor alters the bargain or damages his position.
Section 133 discharges him for any variance made without his consent, and Holme v. Brunskill holds that the court will not inquire whether the variation prejudiced him.
The exception is a variation that is obviously unsubstantial or self-evidently incapable of prejudicing him, and an alteration beneficial to the surety does not discharge him, per M. S. Anirudhan.
Section 134 discharges him where the principal debtor is released by contract, or by an act or omission of the creditor whose legal consequence is that discharge.
Section 135 discharges him on a composition, a binding promise to give time, or an agreement not to sue, unless he assents.
Section 136 preserves the guarantee where the agreement to give time is made with a third person, and Section 137 preserves it where the creditor merely forbears.
Section 138 preserves the liability of the other co-sureties on the release of one, and the released surety still contributes.
Section 139 discharges him completely where his eventual remedy is impaired; Section 141 discharges him pro tanto where a security is lost or parted with.
Amrit Lal Goverdhan Lalan and State Bank of Saurashtra apply Sections 133, 135, 139 and 141 together.
Sections 142 to 144 make a guarantee invalid from the outset where it was obtained by misrepresentation or concealment, or where a co-surety who was to join did not.

10. Related Topics and Provisions

Topic or provision	Connection
Contract of Guarantee under Section 126	Definition, consideration and co-extensive liability
Continuing Guarantee under Sections 129 to 131	Revocation by notice and by the surety's death
Rights of the Surety under Sections 140 to 147	Subrogation and securities, which explain why the discharge provisions exist
Discharge of Contract	Novation, rescission, alteration and remission
Sections 133 to 139, Indian Contract Act	Discharge by the creditor's conduct
Sections 142 to 144, Indian Contract Act	Guarantees invalid from the outset
Sections 140 and 141, Indian Contract Act	Subrogation and the benefit of securities
Sections 62 and 63, Indian Contract Act	Novation and remission
Section 44, Indian Contract Act	Release of one joint promisor, the parallel to Section 138